Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

For the average family, the mortgage interest rates have to drop considerably more than expected returns on investments for low rates to be a positive.

Since the price of retirement savings is so much greater than the price of houses, when both rates move down in sync, houses become less affordable because so much money has to go towards catching up on retirement savings shortfalls.

Similar to the 1999-2000 stock market peak, graphs of anything to do with interest rates from the late 70s to now are driven by the 1979-80 interest rate peak. There is no way to use 1980 as a starting point for understanding normal housing affordability.

Bernanke has made it very clear in speeches that one of his primary objectives, maybe the biggest objective, is to raise asset prices, particularly housing and stocks. The last round of QE is almost entirely focused on maintaining or pushing up the house price to median income ratio for the next few years so that housing prices will stay up since median income is not rising.

So we have median house prices to income ratios higher than normal and PE10 in the upper quintile. As long as Bernanke keeps interest rates unconscious and on the floor, these are sustainable valuations. However, the instant they wake up and try to get off the floor, watch out below.

It is notable that investing in houses now appears to be more focused on rental returns instead of flipping for an overnight profit . The mindset seems to be shifting away from thinking that houses and stocks will appreciate it rates significantly greater than historic norms, so maybe we will get some normalcy in the markets over the next decade where we will be within historical valuation ratios instead of constantly being an outlier.

The first line of the article states that “if a person earning the median income of $52,513 buys a home at the median price of $157,400″. That’s inline with estimates of current household income, so the article is looking at household and not individual income.

Far too much stuff is written about housing using terms like ‘median price’. Housing is infinitely varied.. there are starter homes and move-up homes and mcmansions and suburban estates and downtown condos and second homes and all in location after location, each with its own market profile. As demographics change, the aggregate market profile changes. Preferences change. Family size changes. Perceptions of ‘normal’, ‘big’, ‘little’, ‘style’… all change.
I somewhat understand the point this article makes, but do not fully agree with it. There are too many options to sum it all up with a one-size-fits-all story and only 40 years or so of data.

We’re in the midst of historic precedence between Keynesianism and Monetarism.

Austrians & Classic Liberals were mortally wounded as of 2008, even Greenspan, Ayn Rands living protege, waved a white flag, pleading with the GOP to raise taxes in 2010.

The answer depends on whether we can continue driving rates lower and lower to afford everyday Americans cheaper credit to supplant lack of wealth & wages for 99% of the populace, or, will we have to resort to fiscal means to level the scales?

To Quote the Fed chair through the Great Depression -

The United States economy is like a poker game where the chips have become concentrated in fewer and fewer hands, and where the other fellows can stay in the game only by borrowing. When their credit runs out the game will stop.” – Marriner Eccles (1951)

I don’t understand what’s “misleading” about this. When interest rates go down, the prices of long term assets go up. It’s an inverse relationship. What is new or misleading about this?

Interest rates are not down merely because of the “Nefarious Bernanke”. They are low because investors prefer safe assets right now. As we have seen in Japan, the rates may stay low for a lot longer than many might expect. Housing *should* be “expensive” in nominal terms in such an environment. Again, if this surprises you or seems “misleading”, you should read a book and learn something or you’re going to eventually be taken to the cleaners by someone who understands the simple inverse relationship between long term assets and interest rates.

Yes, at some point (if I knew when, I’d be assured of making *lots* of money), interest rates will start to go up again and the prices of long term assets will move down again. This will not be surprising or misleading at the time. It will be the operation of the simple inverse relationship between the two things. It need not be armageddon because the price of a home went down. Yes, if it’s a bubble based on lax lending standards, then that could threaten the entire financial system. But if it’s just some people who got caught solely in long term assets in an interest rate spike, then that’s just the way the game is played (and it’ll be ok).

Housing and the stock market should be nearing highs in this environment, and then they will reverse when rates reverse. Again, this should not be surprising, now or then.

“I don’t understand what’s “misleading” about this. When interest rates go down, the prices of long term assets go up. It’s an inverse relationship. What is new or misleading about this?

Interest rates are not down merely because of the “Nefarious Bernanke”. ….”
~~~
Agree on asset appreciation for equities, however,

Fed ownership of Treasuries via QE is massive, closing in on $2 trillion, in turn this keeps rates low, that’s the gist of QE….there’s nothing “nefarious” in Bernanke doing this, it’s the only thing putting money back in the hands of the middle class until the wing-nut extremist compulsive filibuster’s in Congress & Senate get voted out..(2012 was an encouraging sign)

I recall when an 11% mortgage was cheap, some refi’s are going below 3%, that’s an absolutely massive surge in buying power,

We’re not seeing excess inflation (yet) in materials or commodities (except grains {from last years droughts}) – increased consumer buying power through QE is being offset by high unemployment & lower wages, energy prices are being staved by domestic fracking, mindful of CFMA deregulation and what happened to oil on ’08.

Homes can be affordable even while they are not cheap. The key to understanding is to remember that a residence is both an asset and housing. The asset is not cheap, but the housing is affordable.

While rising interest rates will certainly impact the price of the asset, the value of the housing will provide some support and dampen the inverse relationship. Assuming that the eventual rise in interest rates reflects an improved economy, rental costs are likely to rise along with interest rates.

The Bernank may (rightly or wrongly) fear deflation, but instead of inflating equity prices with $85 billion per month that Benny and The Fed are churning into banks, America should be INVESTING to renovate our rapidly aging infrastructure. Imagine the difference that could make to GDP over the next 40-50 years, eh? Make that duh, cubed.

The ratio of prices to incomes in Miami is the highest ever, except for the bubble mania period. There’s a chart at http://therealestatefountain.com/2012/11/23/dont-wait-up-for-santa-claus/. The chart is from last November, so the distortion has been in place for a while. If incomes don’t rise when rates do, prices go back down. Banking system doesn’t want that, so Fed will probably try to relate eventual rate increases to income gains, ideally lagging income gains enough so the bad debt can be gradually made good through the alchemy of inflation.

I wonder if the author took into account the interest rates of the 1989-1999 period (4x today) and incorporated it into their ratio. 2.6x might translate to 3x or more given the PIT of each era.
Good article,but not so sure on the quantitative side. Lots of questions.

At its peak in 2005 median national home price exceeded its historic price/family-income ratio trend by
52% ($75k). By 2009 it declined to 7% and finally attained equilibrium in 2011. Homes were 14% overpriced in the 1989 realty bubble. The median home is presently a mere 2% ($3k) above trend.

Conversely, New Homes bottomed way back in 2009 and will smash the 2007 annual record in the coming weeks. Still, the median is overpriced by only 4% ($9k).

I am not especially in favor of clarifying my comments, but I would just like to point out that I do not condone the current state of regulations or policies in place in the United States, which I believe overwhelmingly favor what is almost certainly a plutocracy.

Also, I did not, at any point, say that the US was going to have the same experience as Japan. I merely stated that Japan was an example of interest rates staying lower than what most expected for very much longer than most expected. Low interest rates happen, I guess, like sh*t happens. Sometimes, at least.

I do not claim to have any special insights into the economy. I do believe that 2 plus 2 equals 4 rather than 5, and I do believe that long term assets are generally valued by discounting expected revenue streams to present value using long term interest rates (risk-adjusted). I think these are relatively safe beliefs, but I’ve been wrong before, and I’ll almost certainly be wrong again; so take everything I say with a grain of salt.

Here are some other thoughts: – when inflation is high,
nominal interest rates will also usually be high. – nominal house
prices will also tend to rise faster in times of inflation, even if
only to maintain real value at par. – so in nominal terms, high
interest rates will be seen at the same time as high nominal house
price inflation. They are not cause and effect, but they are seen
together. – additionally, when house prices are inflating fast
(nominally), buyers may be tempted to borrow more than when the
cost of borrowing is cheaper because the penalty for not owning is
seen as greater. So it seems to me that we can point to two
opposite effects, and the question will be which effect is
strongest at any given time. One effect, as stated in earlier
posts, is that cheap (and plentiful) lending drives up prices. But
also, expensive (and plentiful) lending in the context of heavy
inflation also are markers for price rises. Perhaps the argument
might be that in our current low inflation world (if that be the
case) it is the cost of borrowing that matters most. Still, it did
less than nothing for Japanese house prices over the last 15 years
and that needs, at least, to be explained away when looking at
other markets.

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About Barry Ritholtz

Ritholtz has been observing capital markets with a critical eye for 20 years. With a background in math & sciences and a law school degree, he is not your typical Wall St. persona. He left Law for Finance, working as a trader, researcher and strategist before graduating to asset managementRead More...

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